Vodafone Group PLC (LSE:VOD) is becoming a more compelling investment as it seems to be stepping up mergers and acquisitions (M&A) activity under pressure from activist investors, according to investment banks Citigroup and JPMorgan.
Citi, reiterated its ‘buy’ recommendation and share target price of 170p, as reports and speculation stepped up around potential mergers and sell-offs for its Spanish, UK, and most recently Italian business.
"Yet more smoke,” Citi said in a note to clients on Tuesday, saying Vodafone's “multiple options in Europe take centre stage and a compelling [sum-of-the-parts] case comes to life”.
The rumour mill has been smoking since Cevian Capital, the Swedish activist investment firm, was confirmed as having built up a stake in the group. Cevian takes an active approach with its investments and pushes them towards M&A.
According to JPMorgan, it is “clear that Vodafone is aggressively evaluating portfolio options
across the entire group and see scope for material value creation.”
The US bank added that cost synergies from potential merger combinations across the UK, Italy and Spain could be at £6.3-7.2bn, €5.2-5.9bn, and €7.8-8.9bn, which it believes could improve share price by roughly 30%.
Cevian’s stake in the business may also lead to the creation of value via other routes, such as “divesting non-core assets, reducing group financial leverage, and improving operational execution,” according to JPMorgan.
JPMorgan also stated that a deal in the UK and Spain will be more likely than in Italy, citing “remedy risks and deal structure consideration potentially complicated.”